US and Europe’s stock markets are better early this morning , taking prices lower for MBSs and treasuries. At 8:30 June PPI was expected to increase 0.3%, was up 0.4%; the core (ex food and energy) was however in line with forecasts, +0.2%. Yr/yr overall PPI +1.9%; yr/yr core +1.8%, down from 2.0% yr/yr in May. On the report treasuries slipped a little more and MBS prices lost a couple of basis points. At 9:00, prior to the June industrial production and factory usage, the 10 rate at 2.56% +1 bp from yesterday’s close, 30 yr MBS price -8 bp after being off 5 bp yesterday.
June industrial production at 9:15 was +0.2%, weaker than 0.4% expected and may production was revised lower, from 0.6% to +0.5%. June factory usage at 79.1% unchanged from May which was revised from 79.2% to 79.1%. Both fractionally weaker but close enough for traders to ignore it. The stock market didn’t react to the data; either PPI or industrial production and factory use. Prior to the stock market open the DJIA traded +60, NASDAQ +25, S&P +8. At 9:30 the DJIA opened +66, NASDAQ +31, S&P +10; 10 yr note 2.56% +1 bp and 30 yr MBS prices -4 bps.
At 10:00 the NAHB July housing market index, expected to have ncreased to 51 from 49 in June; the sentiment index shot up to 53. The current conditions component increased, future sales index +6 to 64, buyer traffic is still under 50 but at 39 was up 3 points. Overall a better report than we have seen in a long time. There was no initial reaction to the report as Yellen is beginning her testimony.
Yellen is back at the House Financial Services Committee. Yesterday her comments were not much different than what she and other Fed officials have been saying. The economy is improving but still faces headwinds; the labor market has improved but the quality of jobs is bothersome to the Fed; mostly low paying and a lot of workers having to take part-time jobs because full time isn’t available. Yellen outwardly worried about the decline in the labor participation rate, at 62% people are not even looking anymore. When men and women in their prime working years are leaving the labor force, that “suggests something that is not just demographic,” Yellen said in response to a question from Nebraska Republican Senator Mike Johanns following her semi-annual testimony. “My personal view is that a portion of the decline in labor-force participation we’ve seen is a kind of hidden slack or unemployment,” she said. “It may be, if that’s correct, that as the labor market strengthens, that labor-force participation will remain flat instead of the demographic trend continuing to pull it down.” Yellen stepped into the deep end yesterday when she specifically called out what she thinks is over-priced techs and small cap stocks; markets still talking about a Fed chair directly commenting on valuations of specific market sectors.
Our technicals remain slightly positive, however 2.57% on the 10 yr yield must hold, a break above it will damage the near term outlook. We have been floating the last few days and it hasn’t been going well. MBS prices were unchanged yesterday, -23 bps on Tuesday. Lenders are pricing very conservatively this week compared to actual MBS market movement, adding to the price declines. The outlook is still mixed about the economic outlook, the possibility of a major stock correction that has not occurred, the employment conditions (see Yellen above), and when the Fed may begin increasing rates (the consensus is still mid-2015). The treasury market is finding a little support from the geo-political events; Israel/Palestine, Ukraine/Russia, the increasing concerns about the mid-east boiling over. None of the global issues is adding to treasury buying at the moment, but the uncertainty linked with the muddling stock market is keeping interest rates from increasing.
PRICES @ 10:10 AM
10 yr note:-2/32 (6 bp) 2.55% unch
5 yr note:-3/32 (9 bp) 1.71% +2 bp
2 Yr note:unch 0.48% unch
30 yr bond:-1/32 (3 bp) 3.37% unch
Libor Rates:1 mo 0.154%; 3 mo 0.233%; 6 mo 0.326%; 1 yr 0.551%
30 yr FNMA 4.0 Aug: @9:30 105.36 -5 bp (+2 bp frm 9:30 yesterday) 3.5 102.08 -3 bp (+3 bp
frm 9:30 yesterday)
15 yr FNMA 3.0 Aug: @9:30 103.21 -2 bp (+3 bp frm 9:30 yesterday)
30 yr GNMA 4.0 Aug: @9:30 106.28 -3 bp (+3 bp frm 9:30 yesterday) 3.5 103.23 -4 bp (+1 bp
frm 9:30 yesterday)
Dollar/Yen:101.70 +0.02 yen
Crude Oil:$100.67 +$0.71
S&P 500:1981.16 +7.88